FACTORS INFLUENCING COMMERCIAL BANK PERFORMANCE: A CASE STUDY ON COMMERCIAL
BANKS IN CHINA
By JI RUI
A Dissertation Submitted in Partial Fulfillment of the Requirements for the Degree of
Master of Science (Finance) at the Othman Yeop Abdullah Graduate School of Business,
Universiti Utara Malayisa
January 2012
DECLARATION
I hereby declare that the project paper is based on my original work except for quotations and citations that have been duly acknowledge. I also declare it has not been previously or concurrently submitted for any other Master’s programme at Universiti Utara Malaysia or other institutions.
_______________________________________
JI RUI
Date: 12th January 2012
PERMISSION TO USE
In presenting this dissertation as a partial fulfillment of the requirements for a postgraduate degree from Universtiti Utara Malaysia, I agree that the university’s library may take it freely available for inspection. I further agree that permission for copying of this dissertation in any manner, in whole or in part, for scholarly purposes may be granted by my supervisor or in her absence by the Dean, Othman yeop Abdullah. It is understood that any copying or publication or use of this dissertation or parts thereof for financial gain shall not be allowed without my written permission. It is also understood that due recognition shall be given to me and to Universiti Utara Malaysia for any scholarly use which may be made of any material from my dissertation.
Request for permission to copy or to make other use of materials in this dissertation, in whole or in parts should be addressed to:
Dean, Postgraduate Studies
Othman yeop Abdullah Graduate school of Business Universiti Utara Malaysia
06010 Sintok Kedah Darul Aman
ii ABSTRACT
A steady bank system is important cornerstones which can help modern economies maintain stability and healthy development. In order to achieve this goal, China's banking industry has experienced a long-term reformed process. The purpose of this study is to research some vital factors which influence performance of the commercial banks industry in China. This study takes 4 state-owned and 2 joint-stock commercial banks of China as the research sample, by analyzing the impact of the economic variables and bank specific variables on bank performance. The variables are real growth rate, inflation rate, exchange rate, global finance crisis (for economic variables) and bank’s risk management-loan to deposit and equity ratio, bank’s size, property sector, net interest margin factors, interest income ratio and deposit-assets ratio (for bank specific variables). The bank performance is measured by ROE. The findings show that all variables contribute 85.8% to the commercial bank performance in China. Seven factors namely exchange rate, bank’s risk management- equity ratio, bank’s size, net interest margin factors, interest income ratio and deposit-assets ratio are significant determinants of bank performance in China.
ACKNOWLEDGMENTS
My utmost gratitude to my supervisor Professor Dr. Nor Hayati Bt Ahmad, who guided me all the way from the process of submission of the proposal and encouragement to the end of this thesis. Without her help, I would not have made it this far in producing a paper which includes research methods, unfamiliar to me.
However, with her guidance, I have learned and developed a love for research, and with this new found interest, hope to do more research work in the near future. In particular, I would like to thank my examiner Nora Azureen Abdul Rahman who has given a lot of guidance upon the completion of this thesis.
I would like to thank my parents, who have been a continuous source of inspiration and encouragement. Thanks for giving a great support throughout the duration of my studies and unceasing prayers for my success.
In addition, thanks to my friends that helped, supported and provided insightful and useful ideas, constructive comments, criticisms and suggestions throughout the duration of completing this research.
Thank you.
iv
TABLE OF CONTENTS
PERMISSION TO USE ... i
ACKNOWLEDGMENTS ... ii
ABSTACT ... iii
TABLE OF CONTENTS ... iv
LIST OF TABLES ... vii
LIST OF FIGURE... viii
LIST OF ABBREVIATIONS ... ix
Chapter One Introduction ... 1
1.1 Introduction ... 1
1.2 Research Background ... 4
1.3 Problem Statement ... 6
1.4 Research Objective ... 7
1.5 Significance of The Study ... 8
1.6 Summary ... 10
Chapter Two Evolution of Banking System in China ... 11
2.1 Introduction ... 11
2.2 Evolution of Banking System in China ... 11
2.3 Overview on Commercial Bank in China ... 13
2.3.1 Industrial and Commercial Bank of China (ICBC) ... 17
2.3.2 Agricultural Bank of China (ABC) ... 17
2.3.3 Bank of China (BOC) ... 18
2.3.4 China Construction Bank (CCB) ... 19
2.3.5 Bank of Communications (BCM)... 20
2.3.6 China Merchants Bank (CMB) ... 20
2.4 General Assessment of Bank Performance ... 21
2.5 Concluding Remarks ... 22
Chapter Three Literature Review ... 24
3.1 Introduction ... 24
3.2 Literature on Related Studies on Foreign Banks ... 25
3.3 Literature on related Studies on Local Banks in China ... 28
3.4 Summary ... 32
Chapter Four Methodology ... 33
4.1 Introduction ... 33
4.2 Bank Performance Evaluation Model ... 33
4.2.1 Profit Rate ... 34
4.2.2 EVA ... 35
4.2.3 The Balanced Scorecard Method ... 36
4.2.4 DuPont Analysis-ROE ... 36
4.2.5 CAMEL ... 36
4.3 Sample Selection ... 37
4.4 Sources of Data ... 37
4.5 Bank Performance Variables ... 38
4.6 Methodology ... 42
4.7 Summary ... 44
Chapter Five Analysis and Findings ... 45
5.1 Introduction ... 45
5.2 Comparative Statement of the ROE and Net Income in each Bank... 45
5.3 Descriptive Statistics ... 48
5.3.1 Descriptive Statistics – Frequencies ... 49
5.3.2 Descriptive Statistics – Crosstabs ... 52
5.4 Correlation Analysis ... 53
5.5 Regression Analysis ... 57
5.5.1 Regression result of the economic variables ... 57
5.5.2 Regression result of the bank specific variables ... 61
5.5.3 Regression result of the all variables ... 64
Chapter Six Conclusion ... 67
6.1 Introduction ... 67
vi
6.2 Summary of Objectives and Findings ... 67
6.3 Recommendation for Further Research... 70
REFERENCES:... 72
Appendix 1: Figures and Tables ... i
Appendix 2: China’s Banking Reform ... iii
Appendix 3: Histogram of Descriptive Statistics ... vii
Appendix 4: Descriptive Statistics- Crosstabs Result ... xiii
Appendix 5: Regression analysis Result ... xvi
LIST OF TABLES
Table 2.1 Listed Banks Major Financial Data in 2010 ... 14
Table 4.1 Indicators of Bank Performance ... 39
Table 5.1 ROE of each bank ... 46
Table 5.2 Net income of each bank (yuan) ... 47
Table 5.3 Economic Variables Frequency ... 49
Table 5.4 Bank Specific Variables Frequency ... 50
Table 5.5 Descriptive Statistics... 51
Table 5.6 ROE * FX ... 52
Table 5.7 ROE * RSKE(ER) ... 53
Table 5.8 Economic variables correlation ... 54
Table 5.9 Bank specific variables correlation ... 55
Table 5.10 Model Summary (Economic Variables) ... 58
Table 5.11 ANOVA (Economic Variables) ... 58
Table 5.12 Coefficients(Economic Variables) ... 59
Table 5.13 Model Summary (Bank Specific Variables) ... 61
Table 5.14 ANOVA (Bank Specific Variables) ... 61
Table 5.15 Coefficients (Bank Specific Variables) ... 62
Table 5.16 Model Summary (All Variables) ... 64
Table 5.17 ANOVA (All Variables) ... 64
Table 5.18 Coefficients of all variables (All Variables) ... 65
viii
LIST OF FIGURES
Figure 2.1 Total Assets of Banks in 2010 By Bank ... 15
Figure 2.2 Net Income of Banks in 2010 By Bank ... 15
Figure 2.3 Earnings Per Share of Banks in 2010 By Bank ... 16
Figure 2.4 Capital Adequacy Ratio of Banks in 2010 By Bank ... 16
Figure 5.1 Curve Figure of ROE for each bank ... 46
Figure 5.2 Curve Figure of Net incomes for each bank ... 48
LIST OF ABBREVIATIONS SOCBs-- state-owned commercial Banks
JSCBs-- joint-stock commercial banks CCBs-- city commercial banks
UCCs-- urban credit cooperatives
ICBC--Industrial and Industrial and commercial bank of china, ABC--Agricultural Bank of China,
BOC--Bank of China
CCB--China Construction Bank BCM--Bank of Communications CMB--China Merchants Bank GDP-- real growth rate
INF--inflation rate FX--exchange rate
GFC--global financial crisis
MRISK(ER)--bank's risk management factors of equity ratio MRISK (LTD)--bank's risk management factors of loan to deposit SIZE--size of bank
SPROP--property sector NIM--net interest margin IIR-- interest income ratio DAR--deposit-asset ratio
1 Chapter One Introduction
1.1 Introduction
This thesis intends to study the factors influencing commercial banks performance in China. The study gives special attention to China in new of the growing importance of banks to China’s economy. This study combine economic and bank specific variables to analyze how they influence commercial bank performance in China.
At present China banking system include four big state-owned commercial banks, 11 share-holding commercial banks. Many of the commercial banks and credit cooperatives have competitors from China foreign financial institutions. In addition, there are policy banks in specific fields established with special functions. According to China accession to WTO commitments, China opened its banking system to global market domestic in 2006. China banking financial institutions’ total asset is RMB31.59 trillion, more than 14.0% growth compared to the corresponding period last year. Total debt is RMB 30.32 trillion, more than 13.8% growth than the corresponding period last year. Among them, the state-owned commercial banks' total assets accounted for 53.6% of the total assets of banking industry, total liabilities accounts is 53.5% of that of the banking financial institutions in China.
China banking is the most important part of the financial system (66% of the total
The contents of the thesis is for
internal user
only
71
correlation analysis and linear regression analysis, hopefully future research can apply such Data envelopment analysis (DEA) or CAMEL evaluation system.
Because they are also highly used assess the bank performance by the researchers.
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